The Nightmare Scenario

It’s safe to say that as this is written at noon EST on Monday the 24th, every economic policymaker in this hemisphere (and a lot of sleepless folks elsewhere) are staring at screens and wondering if this is it. They’ve been playing with fire for such a long time, trying to balance incompatible goals of low interest rates, stable currencies and accelerating growth, that for a while they almost believed that they would get away with it, that the laws of economics could be bent to their will forever.

Now they see that this was hubris, that their sense of control was just an illusion bought with credit on a scale so large that the numbers had become meaningless.

During the night, emerging market stocks tanked again, led, ominously, by China. This morning the carnage has shifted to the US, where stocks are down hard but, more important, interest rates are still rising. 10-year Treasuries, the key to mortgage rates and pretty much everything else, now yield nearly twice what they did a year ago. That means massive losses for a whole world of risk-averse investors who thought they were parking their money in the safest-possible asset. Presumably the rest of their capital is in riskier places like stocks and junk bonds, which means they’re losing big across the board.